Fresh debt sale set to rattle Indian bonds as rate-hike jitters persist

Mumbai: Indian government bonds may experience selling pressure ahead of a fresh issuance during the upcoming weekly auction on Friday, as investors grapple with uncertainty over the central bank's interest-rate strategy. The benchmark 6.94% 2036 bond yield could fluctuate between 7.38% and 7.42%, according to a trader at a primary dealer, following its last closing price of 7.3921% in the previous session.

When yields increase, bond prices fall. New Delhi plans to sell 340 billion rupees ($3.58 billion) of the benchmark security later in the day, bringing the total issuance of the security to 2.38 trillion rupees. Market sentiment is already highly negative, and traders predict the cutoff yield may surpass 7.40% levels. September consumer inflation in India surged to 5.54%, signaling a potential breach of the 6% threshold set by the central bank in October.

Reserve Bank of India Governor Sanjay Malhotra suggested during a recent interview that while the central bank typically avoids monetary policy interventions to protect financial stability, such moves are becoming increasingly necessary. The combination of persistent inflation and the RBI's heightened emphasis on currency stability has fueled expectations of a larger December rate hike, exerting upward pressure on short-term bond yields and overnight indexed swap rates.

Furthermore, the central bank's stricter maintenance rules for daily cash reserve ratios, set to commence on Friday, could exacerbate the situation, particularly for shorter-duration bonds.